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Petrobras Fails To Sell Vitoria 10000 - That's Good News

Includes: NE, PACD, PBR, RIG, VAL
by: Vladimir Zernov

Bassoe Offshore reports that Petrobras failed to sell drillship Vitoria 10000.

No bids were submitted.

This is a good development for the offshore drilling industry as another rig is leaving the active supply.

As previously reported, Petrobras (PBR) was trying to sell drillship Vitoria 10000 via an auction. Vitoria 10000 is a drillship of a Samsung 10000 design built in 2010, which is currently warm stacked in Brazil. The minimum price for the rig was set at $47.5 million. Bassoe Offshore has just reported that the auction closed with no bids. At first glance, the news looks depressing - no one wants a modern drillship for less than $50 million! However, I believe that it's a positive development. Here's why.

Back in 2016, Ocean Rig, which was ultimately acquired by Transocean (RIG), bought a 6th-gen drillship called Cerrado for $65 million and later renamed it Ocean Rig Paros. It was widely reported that other drillers looked into the potential purchase but decided against it. At that time, many observers including myself believed that the main reason for this was poor contract activity and perspectives for stacking the newly purchased rig for some years. However, it turned out that the main problem with the rig was its technical condition and Transocean had to scrap Ocean Rig Paros as the price of returning it back to the active fleet was exorbitant.

In this light, the low minimum price set for Vitoria signals that the rig was far from the "ready to work" state despite being classified as "warm stacked". Apparently, a material investment is necessary to transfer Vitoria to the drilling mode. Such investment can only be justified if a major contract is attached to the rig. Even with a contract, selling a rig that requires investment is not an easy task as highlighted by the story of Sete Brazil rigs.

In my opinion, Vitoria 10000 is de-facto dead after no one showed up to buy it for $47.5 million. Drillers are in a challenging financial situation and the ultra-deepwater recovery is not as robust as industry participants hoped, so no one is going to gamble and invest money in a rig.

Will Petrobras' failure to sell Vitoria impact the valuation of other rigs? I don't think so. As obvious from Bassoe Offshore rig value estimates, the market is starting to distinguish between rigs that have little to no chance to go back to work and the ones who have future. In current conditions, if a drillship is valued below $100 million, it is doomed to the scrapyard. Examples are Noble Corp.'s (NE) Noble Bully I and Sertao, Ocean Rig Paros sistership. Many cold stacked rigs are also in the "danger zone": Transocean's Discoverer Americas, Discoverer Clear Leader, Discoverer Luanda and Ocean Rig Olympia, Valaris' (VAL) DS-3 and DS-5, Pacific Drilling's (PACD) Pacific Mistral (other cold stacked rigs are also under question, of course).

So, I believe that the results of this Petrobras' auction are positive for the industry as another drillship is eliminated from potential supply. Recently, local Brazilian rigs were getting new contracts by bidding way below international drillers, and the emergence of another rig in the sector would have definitely be a blow to international drillers' plans regarding increasing their presence in the region.

In the near-term, the market has much bigger news to focus on as it is not yet clear what options will be used with Iran which is accused of attacking Saudi oil infrastructure and how this will impact oil prices. However, the de-facto elimination of Victoria 10000 from supply is another small step in the right direction for the ultra-deepwater market. As usual, I'd reiterate that all offshore drilling stocks are highly speculative and very volatile, so proceed with caution and manage your risks accordingly.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may trade any of the above-mentioned stocks.